Rising grain prices and a hostile takeover bid for Potash Corp. are breathing new life into recession-battered agriculture stocks.

More gains may lie ahead because of the tight global market for grain, improving diets of an emerging middle class in developing countries like China, and the seasonal nature of agricultural stocks, analysts say.

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Fertilizer stocks got a boost last Friday when corn and other grain prices jumped after the U.S. Department of Agriculture reduced its corn production forecast by 4 per cent for the 2010-11 season from its September estimate. By late next summer, U.S. corn inventories are expected to fall below one billion bushels, the lowest since the 1995-96 crop.

"Corn is the largest user of fertilizers," said Martin Roberge, a Montreal-based portfolio strategist with Dundee Securities Inc. "We are basically in the sweet spot for industry fundamentals with demand recovering while inventories are getting tighter."

Rising fertilizer prices are likely to propel the sector higher, and the momentum should continue for another three to six months, suggested Mr. Roberge, who in January made fertilizer stocks his top pick for 2010.

He suggests investors look at potash miners such as Potash Corp. and Mosaic Co. or fertilizer makers such as Agrium and CF Industries The latter two companies are likely to get an additional boost from higher margins because of falling prices for natural gas, which is used to produce fertilizer.

The $38.6-billion (U.S.) bid for Potash Corp. by BHP Billiton Ltd. of Australia has highlighted the potential in the fertilizer sector, said Ian Nakamoto, director of research at MacDougall MacDougall & MacTier. He has a one-year target of $165 (Canadian) a share on Potash Corp. based on a takeover either by BHP or another suitor.

But Agrium is his top pick among fertilizer plays. "I call it a one-stop shopping stock for the average investor" because it is both a fertilizer producer and a retailer of agricultural supplies and services, he said. He revised his target to $97 a share on Wednesday after Agrium blew through his previous one at $83. "It's the classic buy-and-hold stock," he said, pointing to the long-term need for higher crop yields to feed newly affluent consumers in China and elsewhere. "Dietary patterns are changing for two-to-three-billion people, and that is not going away any time soon."

With more money in the pockets of farmers from rising grain prices, Mr. Nakamoto expects they will spend more to buy seeds and equipment to boost yields, and that should benefit companies like Monsanto a seed producer, and Deere & Co., a farm equipment manufacturer. The risk in playing the agricultural sector is falling crop prices, but "I don't think that is likely in the short term," he said.

Agriculture stocks tend to make their biggest moves during the last five months of the year, particularly in November and December, said Brooke Thackray, author of an investing guide focused on seasonal trends.

After the summer growing season in the northern hemisphere, farmers flush with cash look for ways to reduce their taxable income and tend to make their purchases of farm equipment or fertilizers before year-end, said Mr. Thackray, a researcher on the HAP Seasonal Rotation exchange-traded fund (ETF).

Investors who want broad, one-stop exposure to the agriculture sector can do so through ETFs such as the U.S.-listed Market Vectors Agribusiness ETF or, in Canada, the Claymore Global Agricultural ETF .

"From 1994 to 2009, the Standard & Poor's GICS agriculture sub-index focused on U.S. stocks has risen 15.5 per cent on average in the last five months of the year," Mr. Thackray said. "Out of the 16 cycles, there have been six years of returns greater than 25 per cent. The only large loss was in 2006, when it fell 27.4 per cent. But that year was the start of a strong commodity boom with the index increasing 78 per cent in the first seven months of the year."

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